Small Business Tax Solutions
Brunetti, Frank L., Journal of Accountancy
This is part of a regular series covering tax issues of special interest to small business based on questions from the American Institute of CPAs tax certificate of educational achievement (CEA) courses on tax planning and advising for closely held businesses. This month, tax CEA author Frank L. Brunetti, Esq., LLM, professor of law and taxation at Fairleigh Dickinson University, Tea-neck, New Jersey, and a partner of Stern, Steiger, Croland, Paramus, New Jersey, answers two questions on tax accounting and deferred compensation plans for directors.
Q Is the consent of the commissioner of the Internal Revenue Service needed to correct an erroneous method of accounting if the period has not expired for amending the return for the first year in which the taxpayer used that method?
A Under Internal Revenue code section 446(e) taxpayers generally must secure IRS consent to change an accounting method. In revenue ruling 90-38, 1990-1 C.B. 57, the IRS ruled that, without IRS consent, a taxpayer may not retroactively change from an erroneous to a permissible method by filing an amended return, even if the time to file the amended return has not expired. Indeed, in technical advice memorandum (TAM) 9439002, a taxpayer was denied a request for a retroactive change from an erroneous accounting method when he filed a refund claim.
Q A taxpayer elects to defer part of his or her board-of-director under a nonqualified deferred compensation plan. Under constructive receipt doctrine, can a taxpayer exclude those fees from taxable income if the plan provides that before the beginning of a calendar year, participants can elect to defer a specified dollar amount or percentage of the fees paid for board service for the subsequent calendar year?
A In TAM 9420009, the IRS approved a plan that provided benefits for board members in the event of their death or termination from the board. In accordance with revenue procedure 92-65, 1992-2 C.B. 428, the plan
* Provided for deferral of payments.
* Defined the time and method for payment.
* Provided for benefit payments in cases of "unforeseeable emergency."
* Provided that participants have the status of general unsecured creditors.
* Provided that the right to benefits is not subject to anticipation, alienation, transfer or sale, for example. …